McGraw-Hill splits business into two public entities: McGraw-Hill Markets and Education. Harold “Terry” McGraw III is to head up McGraw-Hill Markets, disregarding his family’s legacy by breaking up the business founded by his great-grandfather in 1888.
Legacy aside Harold “Terry” McGraw III knows too well on which side his bread is buttered. By casting off the education division and concentrating on McGraw-Hill Markets he knows he has a better chance to create significantly more shareholder’s value than by hanging on to education. Perhaps he came to the conclusion some time ago before Janus Partners and the Ontario Teacher’s Pension Fund pushed McGraw-Hill to break up the company. However there was one catch: S&P, the leading contributor of growth and profitability, had run into trouble due to its involvement in rating structured debt obligations and the subsequent regulatory and legal problems. Naturally with S&P being in hot water the timing was not right to break up the company. Nevertheless having two entities underperforming makes shareholders extremely nervous and sour their opinions about conglomerates.
McGraw-Hill Markets will consist of Standard & Poor’s; S&P indices; S&P Capital IQ; the financial data and research business; and Platts the group’s energy and metals information and indices business. Total revenue will be approximately US$4 bn and synergies between these businesses would drive “double-digit growth and profitability. In essence an entirely new business information and rating enterprise is being created.
McGraw-Hill Education will have revenues of approximately US$2.4bn with an estimated single-digit revenue growth. It will be the second-largest education business after Pearson, offering print and digital materials for school, college and professional education markets worldwide.
According to Outsell’s recent Insight (McGraw-Hill divides in order to conquer) the success of the education business is by no means assured. There is always the likelihood of the education business becoming an acquisition target, but the list of possible buyers remains opaque. McGraw-Hill’s major competitors are most unlikely to be contenders because of antitrust reasons. Despite generating 30% of total revenues from digital services McGraw-Hill’s strength remains in the more traditional print textbook space, particularly in higher education. That is not the case with Pearson who is ahead with 50% in the digital space. According to Outsell’s analyst Kate Worlock the education market has too many players and not enough space. Compounding factors are educations budget constraints; hence an industry consolidation may be unavoidable.
Surprise, surprise, someone remembered the D&B media empire breakup 15 years ago: Financial Times quoted Peter Appert, a Piper Jaffrey analyst who said that McGraw-Hill shareholders had a close parallel to consider: From the divisions which D&B spun off, D&B (business information), Moody’s and Gartner are still listed. RH Donnelley went into chapter 11 last year and was subsequently re-launched. Nielsen Media Research and AC Nielsen were acquired by VNU in 1999 and 2001 respectively (Nielsen went public again in 2011). IMS Health was taken private recently.
There is another parallel to be considered. In the D&B case media conglomeration did not work as intended. Management’s quest to create ‘one company’ did not unlock new value creation because there was little synergy between the disparate businesses. It only created a bloated corporate infrastructure. In the end value creation was the result of financial engineering with financial and legal advisors taking the lion’s share of the value creation. Removed from the corporate shackles many of D&B’s units did well initially, but some of them started to ‘drift’ thus losing their independence.
Source: Financial Times, Outsell Insight and Editorial Comment